EIOPA’s January 2023 Risk Dashboard: What are the Investment Implications for Insurers?

On 7 February 2023, the European Insurance and Occupational Pensions Authority (EIOPA) published its insurance risk dashboard, with the latest forward-looking outlook and historical trends related to 10 primary risks insurers face. The dashboard indicates high macro and market risks and medium levels of credit and solvency risk. This aligns with PineBridge’s view that insurers will remain resilient in the face of an uncertain macro environment – bruised but not blindsided.

High market risk

At the start of 2023, volatility in bond and equity markets has continued to top last year’s averages.

How can insurers mitigate heightened market volatility?

Asset class diversification. Elevated bond and equity market volatility can make a diversified allocation across real estate equity, private equity, and private credit a more resilient alternative, as insurers have a governance framework in place that would ensure adequate liquidity in times of stress.

We believe US direct lending (hedged to euros or pounds sterling) is an attractive asset class for insurers looking to mitigate volatility and benefit from a rising interest rate environment. Longer term, PineBridge views commercial real estate favorably for investors who have dry powder to take advantage of market dislocations.

High macro risk

How can insurers navigate increased levels of macro volatility?

Geographical diversification. Given short-term macro challenges and geopolitical tensions in Europe, we continue to have more confidence in investment grade debt in the US and in US dollar-denominated emerging market (EM) debt. Insurers with EM portfolios stand to benefit from China’s reopening and its contribution to an expected resurgence of EM growth that will push the EM growth differential over developed markets (DM) to the widest level it has reached in a decade (EM 2023 forecast GDP growth is 4.5%, versus 1.1% for DM)¹. With a few exceptions, EM inflation is below that of developed markets for the first time in history (EM CPI is 3.7%, versus 6.9% for DM).1

Medium profitability and solvency risk

EIOPA saw no changes to profitability and solvency risks over the past three months. While life insurers’ solvency capital requirement (SCR) ratio has declined for the second consecutive quarter, it remains at a healthy level of 227%2. The SCR ratio of non-life insurers edged up slightly.

PineBridge’s view of insurance solvency

The EIOPA outlook and the recent UK PRA Insurance Stress Test 2022 suggest that European and UK insurers remain adequately capitalized in aggregate. Insurers looking to further improve returns on regulatory capital and reduce solvency ratio volatility could consider security-level capital optimization in their fixed income holdings, alongside higher allocations to illiquid non-rated credit strategies that would be immune to downgrade risk.